There are two main types of retirement plans in the United States. The first is employer-sponsored plans, such as 401k, 403b, and 457 plans. The second type is individual plans, known as IRA accounts. Both allow individuals to save money for retirement, but they also have several key differences.
401k plans are the key type of employer-sponsored retirement plans. Each of these varies slowly, but the basic idea is that employees contribute a portion of their paycheck to an account. The employer may elect to make matching or profit-matching contributions to the account. The plan offers a selection of mutual funds, certificates of deposit, and sometimes individual stocks in which each employee can invest.
Employer-sponsored plans differ from individual plans in three key ways-they are sponsored by the employer not the individual, they usually allow individuals to borrow against retirement assets , and they have limited investment options.
Individual retirement plans come in several different types-traditional IRA, Roth IRA, and others. These are owned by the individual and are funded through individual contributions. There are many different types of investment options in which an individual can invest through an IRA account. It is also possible to set up a self-directed IRA, which allows broad investment options beyond traditional financial instruments.
Individual retirement plans differ from employer-sponsored plans in three ways-they are owned by the individual perpetually, regardless of employment, they allow a broad range of investment options, and they do not allow for direct loans to the owner.